Supply chain financing, as the name suggests, refers to business funding available to aide the supply chain process of business. It is a technology-based business and financing processes that link the various parties in a transaction—buyer, seller, and financing institution— in order to lower financing costs and improve business efficiency. The primary function of supply chain finance is to provide short-term credit that optimizes working capital for both the buyer and the seller.
What is supply chain?
Supply chain refers to the sequence of processes involved in the production – the transformation of raw materials into final products, and distribution of a commodity. In other words, supply chain can be presented as a network between a company and its suppliers, which aims at production and distribution of the final product to the end-buyer.
Additional Read: How supply chain management finance is a new cash source
Why businesses need supply chain financing?
The need for supply chain financing can be associated with working capital cycle. A business with longer working capital cycle takes a longer time in converting the final products into cash, but ensures higher business. The delay in account payables and receivables causes a gap in working capital, leading to a need for an alternative source of financing. This is when businesses need a supply chain financing. They can delay the payment of accounts payable to the supplier and ensure a higher working capital, thus, avoiding the need for a loan.
Alternatively, you can also use supply chain financing credit schemes which have become a thing these days. All you have to do is ensure your business is eligible for the said loan. Additional Read: Techniques of Inventory Management to Save your Money